Paul Goodwin Discusses the High Price of Avoiding Risk

June 7, 2013
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If there is one great truth about investing, it’s that risk and reward always present themselves as a team. You simply cannot get a clean shot at reward without risk sitting on your shoulder the whole time.

In the modern era of stock investing (which I take to mean the last decade of the 20th century until now), we have had some of the most neck-snapping moves viagra sale usa in a relatively short time that the market order viagra cialis has ever experienced. Two major bubbles, viagra online without prescription overnight Tech and Housing, have inflated, burst and left a trail of damaged portfolios in their wakes. And the market has then recovered each time.

For many investors, the only logical reaction to this volatility is to avoid the stock market completely. I have one friend who, whenever he accumulates some cash, just buys a bond. He reasons that the capital preservation (with the peace of mind that it brings) and the small interest that accrues makes it a good bargain.

Maybe so. But that’s true only if your level of risk avoidance is so high that you’re not willing to tolerate any risk at all.

Plus, as I’ve tried to explain on a couple of occasions, he’s missing the gains that are possible when an informed investor participates in a bull market. Missing out on the possibility of big gains is called opportunity risk, which illustrates once again that every strategy comes with some kind of risk attached.

In his Cabot Wealth Advisory on June 6, Mike Cintolo talked about the risk that comes from using a tight trailing stop on a strong growth stock. If the stock corrects (as growth stocks frequently do), you can get stopped out of the stock and miss a chance at really sizable gains when the stock gets going again.

In Chloe Lutts Jensen’s Wealth Advisory on June 5, she discussed the up- and downsides of Bitcoins, the virtual currency that has popped up in headlines over the last few months. As Chloe points out, the big gains (16 cents to $240!?), have been matched by equally large corrections.

In just about any story you read about stocks, bonds, old coins, wine, art, gold, platinum or any other asset class, a responsible author will always review the potential downside. And for every Antiques Roadshow treasure you hear about, you know there are many others who bought the wrong thing or bought at too high a price.

But in the final analysis, the best you can do is accept that risk is always going to be there and strike the best balance between risk and reward that you can.

There is a sweet spot somewhere between sitting on the beach under an umbrella wrapped in a blanket and never getting your feet wet and jumping into the water without knowing what’s under it.

And, just to point out the obvious, for investors who want to have some calm, experienced advice on how to manage risk in any kind of market and in any kind of equity investing—growth, value, options, small-caps, ETFs or emerging markets—there is a Cabot advisory that will help you find the right balance. You can find them here.

In this week’s Stock Market Video, Mike Cintolo gives his thoughts on how to play the overall market, and discusses which sectors (and ETFs) are looking strong and which ones have topped out. The good news is that Mike believes many growth stocks are acting resiliently. He reviews the top handful of names on his watch list, including Tesla Motors (TSLA). Click here to watch the video to find out Mike's stock recommendations, as well as his thoughts on what you should do next.

This is the first week of Fortune Cookies, the feature that replaces our Contrary Opinion Buttons. Every week, Tim Lutts and I will pick a text that has something to say about investing and we’ll do our usual dueling commentaries. I’m always happy to hear your thoughts or your suggestions for a saying or quotation that you’d like to see discussed.

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” William Arthur Ward, college administrator, writer (1921-1994)

Tim’s Comment: Pessimists have no fun; they don't enjoy life. I'm an optimist, so by definition, I'm always expecting the wind to improve. But I do recognize the value of trimming sails, and the wisdom of being a realist, and I wholeheartedly recommend changing in response to those winds—for those who have the ability to change.

Paul’s Comment: Calling someone a “trimmer” (meaning someone who trims his sails in response to the wind) is sometimes intended as an insult, implying that the person changes his principles in response to challenging circumstances. No doubt having an ironclad set of principles is an admirable thing. But not in the stock market. Staying invested in a bear market makes as much sense as staying outside during a downpour because you refuse to let the weather boss you around. Make sure that your principles include one that counsels getting out of the market's way when the sirens sound.

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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 6/3/13—Take Some Profits Now

Tim Lutts, who skippers Cabot Stock of the Month, is delighted by all the recent good news, but recognizes the danger in everybody feeling good. He counsels taking some profits. Tim also admires the recent record of our value guru Roy Ward, editor of Cabot Benjamin Graham Value Investor. Stock discussed: Qualcomm (QCOM).

Cabot Wealth Advisory 6/5/13—Is It Time to Buy Bitcoins?

Chloe Lutts Jensen, editor of Dick Davis Dividend Digest, sorts out the appeal (and dangers) of Bitcoins, the virtual currency that has experienced skyrocketing value. With that increase in value has come a wave of security issues. Chloe tells you how to treat them.

Cabot Wealth Advisory 6/6/13—The Next Baidu?

Editor Mike Cintolo of Cabot Market Letter talks about how using tight trailing stops can kick you out of positions that will later become big winners. He also writes about a Chinese tech company that has the potential to be the next Baidu. Stock discussed: Qihoo 360 (QIHU).

Have a great weekend,

Paul Goodwin
Editor of Cabot China & Emerging Markets Report

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and Cabot Wealth Advisory

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